znga-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                   

Commission File Number: 001-35375

 

Zynga Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

42-1733483

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

699 Eighth Street

 

San Francisco, CA

94103

(Address of principal executive offices)

(Zip Code)

 

(855) 449-9642

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes      No  

As of April 15, 2019, there were 935,282,782 shares of the Registrant’s Class A common stock outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock

ZNGA

Nasdaq Global Select Market

 

 

 

 

 


Zynga Inc.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

 

 

 

 

 

Page

Cautionary Note Regarding Forward-Looking Statements

 

1

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

2

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

 

39

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

40

 

 

 

 

 

 

Item 1A.

Risk Factors

 

40

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Issuer Purchases of Equity Purchases

 

57

 

 

 

 

 

 

Item 6.

Exhibits

 

58

 

 

 

 

 

 

 

Signatures

 

59

Zynga, the Zynga logo and other trademarks or service marks of Zynga appearing in this report are the property of Zynga Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements related to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our growth strategies and intended product releases, and may include certain assumptions that underlie the forward-looking statements. Forward-looking statements often include words such as “outlook,” “projected,” “intends,” “will,” “anticipate,” “believe,” “target,” “expect,” and statements in the future tense are generally forward-looking.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves significant risks, uncertainties and assumptions, including those described in “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and industry. New risks may also emerge from time to time. It is not possible for our management to predict all of the risks related to our business and operations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur, and reported results should not be considered as an indication of future performance. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Except as required by law, we undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.

 

 

 

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Zynga Inc.

Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

199,725

 

 

$

544,990

 

Short-term investments

 

 

46,694

 

 

 

36,232

 

Accounts receivable, net of allowance of $0 at March 31, 2019 and

      December 31, 2018

 

 

147,958

 

 

 

91,630

 

Restricted cash

 

 

35,006

 

 

 

35,006

 

Prepaid expenses

 

 

29,384

 

 

 

26,914

 

Other current assets

 

 

20,506

 

 

 

12,505

 

Total current assets

 

 

479,273

 

 

 

747,277

 

Long-term investments

 

 

5,972

 

 

 

 

Goodwill

 

 

1,471,365

 

 

 

934,187

 

Intangible assets, net

 

 

285,146

 

 

 

118,600

 

Property and equipment, net

 

 

268,101

 

 

 

266,557

 

Right-of-use assets

 

 

19,042

 

 

 

 

Restricted cash

 

 

30,018

 

 

 

 

Prepaid expenses

 

 

29,108

 

 

 

30,774

 

Other non-current assets

 

 

64,101

 

 

 

49,308

 

Total assets

 

$

2,652,126

 

 

$

2,146,703

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,917

 

 

$

26,811

 

Income tax payable

 

 

5,633

 

 

 

4,895

 

Deferred revenue

 

 

285,953

 

 

 

191,299

 

Debt

 

 

100,000

 

 

 

100,000

 

Operating lease liabilities

 

 

9,056

 

 

 

 

Other current liabilities

 

 

257,240

 

 

 

156,829

 

Total current liabilities

 

 

672,799

 

 

 

479,834

 

Deferred revenue

 

 

1,014

 

 

 

1,586

 

Deferred tax liabilities, net

 

 

35,119

 

 

 

16,087

 

Non-current operating lease liabilities

 

 

20,098

 

 

 

 

Other non-current liabilities

 

 

181,367

 

 

 

52,586

 

Total liabilities

 

 

910,397

 

 

 

550,093

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock (Class A), $0.00000625 par value, and additional paid in capital -

      authorized shares: 2,020,517; shares outstanding: 932,490 shares as

      of March 31, 2019 and 861,111 as of December 31, 2018

 

 

3,782,693

 

 

 

3,504,713

 

Accumulated other comprehensive income (loss)

 

 

(111,462

)

 

 

(118,439

)

Accumulated deficit

 

 

(1,929,502

)

 

 

(1,789,664

)

Total stockholders’ equity

 

 

1,741,729

 

 

 

1,596,610

 

Total liabilities and stockholders’ equity

 

$

2,652,126

 

 

$

2,146,703

 

 

See accompanying notes to consolidated financial statements.

 

 

2


Zynga Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Online game

 

$

200,164

 

 

$

161,553

 

Advertising and other

 

 

65,239

 

 

 

46,679

 

Total revenue

 

 

265,403

 

 

 

208,232

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

121,643

 

 

 

69,042

 

Research and development

 

 

161,880

 

 

 

60,825

 

Sales and marketing

 

 

102,011

 

 

 

50,855

 

General and administrative

 

 

21,504

 

 

 

23,253

 

Total costs and expenses

 

 

407,038

 

 

 

203,975

 

Income (loss) from operations

 

 

(141,635

)

 

 

4,257

 

Interest income

 

 

443

 

 

 

1,810

 

Other income (expense), net

 

 

2,112

 

 

 

3,401

 

Income (loss) before income taxes

 

 

(139,080

)

 

 

9,468

 

Provision for (benefit from) income taxes

 

 

(10,252

)

 

 

3,859

 

Net income (loss)

 

$

(128,828

)

 

$

5,609

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.14

)

 

$

0.01

 

Diluted

 

$

(0.14

)

 

$

0.01

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares used to compute net income

   (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

926,230

 

 

 

869,627

 

Diluted

 

 

926,230

 

 

 

893,774

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

3


Zynga Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net income (loss)

 

$

(128,828

)

 

$

5,609

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

6,963

 

 

 

23,134

 

Net change in unrealized gains (losses) on available-for-sale

   marketable debt securities, net of tax

 

 

14

 

 

 

(27

)

Other comprehensive income (loss), net of tax

 

 

6,977

 

 

 

23,107

 

Comprehensive income (loss)

 

$

(121,851

)

 

$

28,716

 

 

See accompanying notes to consolidated financial statements.

 

 


4


Zynga Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Class A

Common Stock

 

 

Additional

Paid-In

 

 

Treasury

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

861,111

 

 

$

5

 

 

$

3,504,708

 

 

$

 

 

$

(118,439

)

 

$

(1,789,664

)

 

$

1,596,610

 

Exercise of stock options and ESPP

 

 

5,097

 

 

 

 

 

 

5,304

 

 

 

 

 

 

 

 

 

 

 

 

5,304

 

Vesting of ZSUs, net of tax

   withholdings

 

 

2,487

 

 

 

 

 

 

 

 

 

(11,010

)

 

 

 

 

 

 

 

 

(11,010

)

Acquisition-related common stock

   issuance

 

 

63,795

 

 

 

1

 

 

 

253,902

 

 

 

 

 

 

 

 

 

 

 

 

253,903

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

18,773

 

 

 

 

 

 

 

 

 

 

 

 

18,773

 

Retirements of treasury stock

 

 

 

 

 

 

 

 

 

 

 

11,010

 

 

 

 

 

 

(11,010

)

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(128,828

)

 

 

(128,828

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,977

 

 

 

 

 

 

6,977

 

Balances at March 31, 2019

 

 

932,490

 

 

$

6

 

 

$

3,782,687

 

 

$

 

 

$

(111,462

)

 

$

(1,929,502

)

 

$

1,741,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Class A, B and C

Common Stock

 

 

Additional

Paid-In

 

 

Treasury

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2017

 

 

870,660

 

 

$

5

 

 

$

3,426,500

 

 

$

 

 

$

(93,497

)

 

$

(1,691,768

)

 

$

1,641,240

 

Exercise of stock options and ESPP

 

 

1,510

 

 

 

 

 

 

3,311

 

 

 

 

 

 

 

 

 

 

 

 

3,311

 

Vesting of ZSUs, net of tax

   withholdings

 

 

2,748

 

 

 

 

 

 

 

 

 

(6,364

)

 

 

 

 

 

 

 

 

(6,364

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

14,113

 

 

 

 

 

 

 

 

 

 

 

 

14,113

 

Repurchases of common stock

 

 

(11,306

)

 

 

 

 

 

 

 

 

(41,175

)

 

 

 

 

 

 

 

 

(41,175

)

Retirements of treasury stock

 

 

 

 

 

 

 

 

 

 

 

47,539

 

 

 

 

 

 

(47,539

)

 

 

 

Adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,024

 

 

 

4,024

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,609

 

 

 

5,609

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,107

 

 

 

 

 

 

23,107

 

Balances at March 31, 2018

 

 

863,612

 

 

$

5

 

 

$

3,443,924

 

 

$

 

 

$

(70,390

)

 

$

(1,729,674

)

 

$

1,643,865

 

 

 

5


Zynga Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(128,828

)

 

$

5,609

 

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,080

 

 

 

7,731

 

Stock-based compensation expense

 

 

18,773

 

 

 

14,113

 

(Gain) loss from foreign currency, sales of investments, assets and other, net

 

 

154

 

 

 

1,951

 

(Accretion) and amortization on marketable debt securities, net

 

 

(153

)

 

 

(549

)

Noncash lease expense

 

 

1,449

 

 

 

 

Change in deferred income taxes and other

 

 

(20,374

)

 

 

1,322

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(30,001

)

 

 

10,682

 

Prepaid expenses and other assets

 

 

3,318

 

 

 

(4,786

)

Accounts payable

 

 

(14,293

)

 

 

(9,574

)

Deferred revenue

 

 

86,474

 

 

 

11,234

 

Income tax payable

 

 

(5,361

)

 

 

(5,004

)

Operating lease and other liabilities

 

 

69,309

 

 

 

(36,676

)

Net cash provided by (used in) operating activities

 

 

1,547

 

 

 

(3,947

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(29,756

)

 

 

(124,822

)

Maturities of investments

 

 

8,500

 

 

 

160,000

 

Sales of investments

 

 

4,987

 

 

 

 

Acquisition of property and equipment

 

 

(5,058

)

 

 

(1,424

)

Proceeds from sale of property and equipment

 

 

46

 

 

 

25

 

Business acquisitions, net of cash acquired and restricted cash held in escrow

 

 

(299,357

)

 

 

 

Release of restricted cash escrow from business combinations

 

 

 

 

 

(22,800

)

Net cash provided by (used in) investing activities

 

 

(320,638

)

 

 

10,979

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of stockholders' equity awards

 

 

(11,010

)

 

 

(6,364

)

Repurchases of common stock

 

 

 

 

 

(39,544

)

Proceeds from issuance of common stock

 

 

4,939

 

 

 

3,311

 

Repayment of debt

 

 

(1,364

)

 

 

 

Other financing activities, net

 

 

(326

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(7,761

)

 

 

(42,597

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

11,605

 

 

 

1,476

 

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(315,247

)

 

 

(34,089

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

579,996

 

 

 

405,677

 

Cash, cash equivalents and restricted cash, end of period

 

$

264,749

 

 

$

371,588

 

 

 

 

 

 

 

 

 

 

Noncash investing activity:

 

 

 

 

 

 

 

 

Acquisition-related common stock issuance

 

$

253,903

 

 

$

 

 

 

 

 

 

 

 

 

 

Noncash financing activities:

 

 

 

 

 

 

 

 

Unsettled stock option exercise

 

$

365

 

 

$

 

Unsettled repurchases of common stock

 

 

 

 

 

1,631

 

 

See accompanying notes to consolidated financial statements.

 

6


Zynga Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Overview and Summary of Significant Accounting Policies

Organization and Description of Business

Zynga Inc. (“Zynga,” “we” or the “Company”) is a leading provider of social game services. We develop, market and operate social games as live services played on mobile platforms, such as iOS and Android, and social networking sites such as Facebook. Generally, all of our games are free to play, and we generate substantially all of our revenue through the sale of in-game virtual items and advertising services. Our operations are headquartered in San Francisco, California, and we have several operating locations in the U.S. as well as various international office locations in North America, Asia and Europe.

We completed our initial public offering in December 2011 and our Class A common stock is listed on the NASDAQ Global Select Market under the symbol “ZNGA.”

Basis of Presentation and Consolidation

The accompanying interim consolidated financial statements are presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The interim consolidated financial statements include the operations of the Company and its owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

The accompanying interim consolidated financial statements and these related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Unaudited Interim Financial Information

The accompanying interim consolidated balance sheets as of March 31, 2019 and December 31, 2018, the interim consolidated statements of operations, statements of comprehensive income (loss), statements of stockholders’ equity and statements of cash flows for the three months ended March 31, 2019 and 2018 and the notes to interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s statement of financial position and operating results for the periods presented. The results for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other future period.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the interim consolidated financial statements and notes thereto. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the estimated average playing period of payers that we use for revenue recognition, useful lives of property and equipment and intangible assets, accrued liabilities, income taxes, the fair value of assets and liabilities acquired through business combinations, contingent consideration obligations, the discount rate used in discounting our operating lease liabilities, stock-based compensation expense and evaluation of recoverability of goodwill, intangible assets, and long-lived assets. Actual results could differ materially from those estimates.

For the three months ended March 31, 2019, we recognized $0.6 million of online game revenue and income from operations from changes in our estimated average playing period of payers that required adjusting the recognition period of deferred revenue generated in prior periods. Further, we recognized $0.2 million of online game revenue and income from operations from games that have been discontinued as there is no further performance obligation. These changes in estimates did not impact our earnings per share for the three months ended March 31, 2019. For the three months ended March 31, 2018, we recognized $0.4 million of online game revenue and income from operations from games that have been discontinued. This change in estimate did not impact our earnings per share for the three months ended March 31, 2018.

Recent Accounting Pronouncements

Issued But Not Yet Adopted

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which aligns the accounting for implementation costs incurred with a cloud computing arrangement accounted for as a service

7


arrangement with the guidance in ASC Topic 350-40, Internal-Use Software to determine which implementation costs should be capitalized. The ASU permits either a prospective or retrospective transition approach and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing this standard’s impact on its consolidated financial statements.

Issued And Adopted

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASC Topic 842”) which requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. For lessors, accounting for leases remains substantially the same as in prior periods. We adopted ASC Topic 842 on January 1, 2019 using the alternative transition approach provided in ASU 2018-11, “Leases (Topic 842) – Targeted Improvements”, which allows initial application of the new standard by recognizing a cumulative-effect adjustment on the adoption date.

Adoption Impact – Lessee Accounting

The adoption of ASC Topic 842 on January 1, 2019 resulted in the recognition of right-of-use assets of $9.1 million, which includes the elimination of our remaining prepaid rent and deferred rent balances, current operating lease liabilities of $7.6 million and non-current operating lease liabilities of $12.4 million. The adoption of ASC Topic 842 did not impact our consolidated statement of operations or consolidated statement of cash flows.

ASC Topic 842 also amends the provisions of ASC Topic 420 – Exit or Disposal Obligations to eliminate the concept of cease-use lease liabilities and instead, requires companies to evaluate leases for impairment in accordance ASC 360 – Property, Plant, and Equipment. Accordingly, upon adoption, we derecognized our $10.9 million restructuring cease-use liability related to our Q2 2015 restructuring plan and simultaneously recognized an operating lease liability for an equal amount, with no associated right-of-use asset.

As part of the adoption, the new standard allows a number of practical expedients and exemptions. At transition, we elected the following:

 

The package of practical expedients, which allows us to carryforward our historical lease classification, assessment of whether a contract is or contains a lease and initial direct costs for any leases that exist prior to adoption of the new standard;

 

 

The practical expedient to not separate non-lease components from the related lease components; and

 

 

The exemption to not apply the balance sheet recognition requirements for leases with a lease term of 12 months or less and instead, expense those costs on a straight-line basis over the lease term, or in the period in which the obligation is incurred, if such costs are variable.

Adoption Impact – Lessor Accounting

There was no impact to our financial statements as a result of adopting ASC Topic 842. ASU 2018-11, “Leases (Topic 842) – Targeted Improvements” also provides lessors with a practical expedient to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (i) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. We have elected this practical expedient.

Refer to Note 6 – “Leases” for further details on our lease arrangements as a lessee and lessor.

8


2. Revenue from Contracts with Customers

Disaggregation of Revenue

The following table presents our revenue disaggregated by platform (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Online game:

 

 

 

 

 

 

 

 

Mobile

 

$

182,833

 

 

$

139,830

 

Other(1)

 

 

17,331

 

 

 

21,723

 

Online game total

 

$

200,164

 

 

$

161,553

 

Advertising and other:

 

 

 

 

 

 

 

 

Mobile

 

$

63,260

 

 

$

42,771

 

Other(1)

 

 

1,979

 

 

 

3,908

 

Advertising and other total

 

$

65,239

 

 

$

46,679

 

Total revenue

 

$

265,403

 

 

$

208,232

 

 

 

(1)

Includes web for Online Game and web advertising revenue and other revenue for Advertising and Other

 

The following table presents our revenue disaggregated based on the geographic location of our payers (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

United States

 

$

172,061

 

 

$

135,996

 

All other countries(1)

 

 

93,342

 

 

 

72,236

 

Total revenue

 

$

265,403

 

 

$

208,232

 

 

 

(1)

No foreign country exceeded 10% of our total revenue for any periods presented.

Consumable virtual items accounted for 34% of online game revenue in the three months ended March 31, 2019 and 46% of online game revenue in the same period of the prior year. Durable virtual items accounted for 66% of online game revenue in the three months ended March 31, 2019 and 54% of online game revenue in the same period of the prior year. The estimated weighted-average life of durable virtual items was nine months for both the three months ended March 31, 2019 and March 31, 2018.

Contract Balances

We receive payments from our customers based on the payment terms established in our contracts. Payments for online game revenue are required at time of purchase, are non-refundable and relate to non-cancellable contracts that specify our performance obligations. Such payments are initially recorded to deferred revenue and are recognized into revenue as we satisfy our performance obligations. Further, payments made by our players are collected by payment processors and remitted to us generally within 30 days. Our right to the payments collected on our behalf are unconditional and therefore recorded as accounts receivable, net of the associated payment processing fees.

Payments for advertising arrangements are due based on the contractually stated payment terms. For advertising arrangements, the contract terms generally require payment within 30 to 60 days subsequent to the end of the month. Our right to payment from the customer is unconditional and therefore recorded as accounts receivable.  

During the three months ended March 31, 2019, we recognized $109.5 million of revenue that was included in the current deferred revenue balance on December 31, 2018.

9


The increase in accounts receivable, net during the three months ended March 31, 2019 was primarily driven by a net increase in accounts receivable of $23.0 million on the acquisition date from our acquisition of Small Giant Games Oy (“Small Giant”) and sales on account during the period exceeding cash collections of current period and previously due amounts. The increase in deferred revenue during the three months ended March 31, 2019 was primarily driven by the sale of virtual items during the period, which includes contribution from Small Giant, exceeding revenue recognized from the satisfaction of our performance obligations.

Unsatisfied Performance Obligations

Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.

 

3. Marketable Securities

The following tables summarize the amortized cost, gross unrealized gains and losses and fair value of our short-term and long-term investments as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

March 31, 2019

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

43,681

 

 

$

17

 

 

$

(5

)

 

$

43,693

 

U.S. government and government agency debt

   securities

 

 

3,001

 

 

 

 

 

 

 

 

 

3,001

 

Total

 

$

46,682

 

 

$

17

 

 

$

(5

)

 

$

46,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

5,968

 

 

$

4

 

 

$

 

 

$

5,972

 

Total

 

$

5,968

 

 

$

4

 

 

$

 

 

$

5,972

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

36,230

 

 

$

2

 

 

$

 

 

$

36,232

 

Total

 

$

36,230

 

 

$

2

 

 

$

 

 

$

36,232

 

 

As of March 31, 2019, all of our short-term investments have contractual maturities of one year or less and all of our long-term investments have contractual maturities between one and two years.  

As of March 31, 2019, we did not consider any of our short-term or long-term investments to be other-than-temporarily impaired. We do not intend to sell, nor do we believe it is more likely than not that we will be required to sell, any of the securities in an unrealized loss position. When evaluating our investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer, our ability and intent to hold the security to maturity and whether it is more likely than not that we will be required to sell the investment before recovery of the amortized cost basis.

 

 

4. Fair Value Measurements

Our financial assets consist of cash equivalents, short-term and long-term investments, accounts receivable, net, and leasehold receivables. Cash equivalents, short-term investments and long-term investments, which consist of money market funds, corporate debt securities and U.S. government and government agency debt securities, are reported at fair value. Accounts receivable, net and leasehold receivables are stated at the net realizable amount, which approximates fair value.

Our financial liabilities consist of accounts payable and accrued liabilities, which are stated at the invoiced or estimated payout amount, respectively, and approximate fair value, contingent consideration obligations as a result of business acquisitions, which are reported at fair value, lease liabilities, which approximate fair value and loans drawn against our Credit Facility; see Note 10 – “Debt” for further discussion on the loans drawn against our Credit Facility.

10


As of March 31, 2019, our contingent consideration obligations represent the estimated fair value of the additional consideration payable in connection with our acquisitions of Gram Games in the second quarter of 2018 and Small Giant in the first quarter of 2019.

Under the terms of the Gram Games acquisition, contingent consideration may be payable based on the achievement of certain future profitability performance targets during each annual period following the acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. We estimated the acquisition date and subsequent reporting period fair values of the contingent consideration obligation using a Monte Carlo simulation. The significant unobservable inputs used in the fair value measurement of the contingent consideration obligation were Gram Games’ projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers. Changes to projected performance of the acquired business could result in a higher or lower contingent consideration obligation in the future. As of December 31, 2018, the estimated fair value of the Gram Games contingent consideration obligation was $49.0 million and as of March 31, 2019, the estimated fair value of the contingent consideration obligation increased to $75.5 million, primarily due to stronger than expected performance and the increased probability of achievement. Accordingly, for the three months ended March 31, 2019, we recognized $26.5 million of related research and development expenses in our consolidated statement of operations.  

Under the terms of the Small Giant acquisition, contingent consideration may be payable based on the achievement of certain future profitability performance targets during each annual period following the acquisition date for a total of three years, with no maximum limit as to the contingent consideration achievable. We estimated the acquisition date and subsequent reporting period fair values of the contingent consideration obligation using a Monte Carlo simulation. The significant unobservable inputs used in the fair value measurement of the contingent consideration obligation were Small Giant’s projected performance, a risk-adjusted discount rate and performance volatility similar to industry peers. Changes to projected performance of the acquired business could result in a higher or lower contingent consideration obligation in the future. At acquisition, the estimated fair value of the contingent consideration obligation was $98.0 million. As of March 31, 2019, the estimated fair value of the contingent consideration obligation increased to $157.0 million, primarily due to stronger than expected performance and the increased probability of achievement. Accordingly, for the three months ended March 31, 2019, we recognized $59.0 million of related research and development expense in our consolidated statement of operations.

We estimate fair value as the exit price, which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants.

The valuation techniques used to measure the fair value of the Company’s financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. We use a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Includes inputs, other than Level 1 inputs, that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs that are supported by little or no market activity.

The composition of our financial assets and liabilities as of March 31, 2019 and December 31, 2018 among the three levels of the fair value hierarchy are as follows (in thousands):

 

 

 

March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

272